There has to be somebody to blame.
Housing prices have yanked the dream of homeownership out of the desperate, clutching hands of millions. Countless tenants don’t even have that dream, chafing under the increasing rent burdens they are forced to bear. And to top it all off, the rich just keep getting richer: The stock market is booming, homeowners have accumulated more than $1.5 trillion in equity since the Covid-19 recession began, and personal savings are up for most higher-income households.
Enter, stage right: Wall Street.
Some people are furious over reports that institutional investors (often private equity firms) are increasing the demand for homes and pushing prices upward. The Wall Street Journal wrote earlier this year that “yield-chasing investors are snapping up single-family houses” and “competing with ordinary Americans.” Marketplace reported the same, noting one buyer had been outbid six times by all-cash offers. Inman writes that consumers are “increasingly competing against institutional investors.” And the Real Deal goes further, claiming that one of the “main reasons for the skyrocketing prices are actually a huge buying spree from institutional investors.”
A recent Twitter thread blaming BlackRock, the world’s largest asset manager, for buying “every single family house they can find … and outbidding normal home buyers” went viral, prompting even J.D. Vance, the Hillbilly Elegy author making a play for an Ohio US Senate seat, to accuse “The Left” of ignoring the situation because of BlackRock’s corporate diversity initiatives.
Blackrock is pursuing an investment strategy that will make it harder for young Americans to own homes. The Left will ignore this, because Blackrock has committed to “racial audits” and other diversity BS. https://t.co/lgtb3xSlO9
— J.D. Vance (@JDVance1) June 9, 2021
It’s important to understand that institutional investors play a small role in the American housing market. While there are big firms for apartments and other multi-family housing units, there traditionally hasn’t been the same level of investment in single-family homes. Yield-chasing investors have turned to the real estate market because it has become a very profitable place to put your money. And the main reason it has become so profitable is the preexisting housing shortage created by local governments and certain homeowners seeking to block new homes from being built, leading to a nearly 4 million home shortage nationwide.
Investors go where the yield is. They are profit maximizers and face strong pressure to return large gains to shareholders. Want to stop them? Build more homes, ensure that they cannot have a large market share and engage in predatory behavior, and reduce the incentive for yield chasers to further commodify the market.
Oh for sure, but the largest investor isn’t Blackrock. It’s American homeowners. And they already have exactly the same incentive. https://t.co/1VxpZyyKf9
— Jake Anbinder (@JakeAnbinder) June 10, 2021
There are still reasons to be concerned. Institutional investors might flip homes and price out some would-be homebuyers, and they might be markedly worse landlords. And private equity has earned its bad name in many cases: increasing the likelihood of layoffs when these firms acquire companies, having shady connections to springing surprise medical bills on people. And there are worries about what might happen if institutional investors are able to gain significant control of local housing markets — like raising rents above the market rate.
However, the idea that institutional investors are somehow largely to blame for the current housing market catastrophe is wrong and obscures the real problem. Housing prices have been skyrocketing due to historically low supply, low mortgage rates, and the largest generation in American history entering the market looking for starter homes.
The birth of the single-family-home institutional investor
After the Great Recession, millions of foreclosed homes hit the market as the economy cratered. Investors stepped in to buy these properties as prices bottomed out and a new industry was born: the institutional single-family-home investor/landlord.
In many ways, this was a much-needed source of demand for a sector of the economy in crisis. Investors were the only ones buying up these homes, and according to research by the Federal Reserve, their entry into the market “appears to have supported house prices in the areas where it is concentrated.” Meaning it may have helped stabilize certain housing markets, as very few people were in the position to buy homes as the financial crisis took hold.
Institutional investors “grew up in 2010-2013 buying distressed properties that no one else would buy and in fact put a floor on the market, so they provided a very, very valuable service and they basically cleaned up the distressed market, a lot of which required repairs,” Laurie Goodman, vice president for housing finance policy at the Urban Institute, explained.
But as the dust settled, some people were outraged as they saw homes in their neighborhoods that once were owned by middle-income families flipped for a profit or turned permanently into single-family rentals.
In a New York Times Magazine article last year, Francesca Mari documented the egregious harms perpetrated by these landlords on struggling Americans. One man’s house was sold to a private equity firm, which forced their tenant to take on responsibilities usually reserved to the homeowner like “mold remediation, landscaping, [and] carbon-monoxide detectors.” Another woman’s rental home was infested with rats and cockroaches. Many more stories abound about countless fees and the threat of dealing with a giant entity with whom the renter inherently has a large asymmetry of power and information.
Mari attributes the problems with “this new breed of private-equity landlords” to their burning desire to return double-digit returns for their shareholders. It’s an incentive that’s led to patterns like exorbitant fees and onerous requirements in leases — and one that smaller investors and mom-and-pop landlords wouldn’t feel.
However, that doesn’t mean that small landlords are necessarily better or less exploitative than large investors. A 2017 New York Times article notes that “some smaller landlords do not fully understand tenant laws, or simply flout them. Rent from a mom-and-pop landlord, and you might get a handshake lease, an informal arrangement that could give you flexibility, or leave you both in a tenuous position.”
But pre-Covid-19 research shows that institutional investors were still very small players. Mari reported that by 2016, private equity firms had acquired more than 200,000 homes — a fraction of the total number in America. A 2018 research paper notes that these investors “account for less than 1 percent of all single-family housing units across the U.S.”
But as prices have exploded over the past year, could it be that institutional investors have become a much larger player?
Institutional investors are still a very small share of the American housing market
Many of the articles claiming that institutional investors are driving up single-family home prices and are competing with average homebuyers rely on research by John Burns Real Estate Consulting. One even claimed that investors are “a main cause” for the hot market, which is not what the John Burns research details. In fact, the report explicitly states that the US is “not in an investor-induced home price bubble today.”
The report found that the share of total home sales that come from investor purchases has actually declined over the past year. And even at its peak in 2013 (when regular sales had bottomed out due to the recession), it only reached 29 percent of total sales. Last year, the firm estimates that investors make up about 20 percent of housing sales.
Importantly, that number is not just the share of institutional investors but anyone who isn’t just buying a house for their own primary residence — that includes people buying second homes or vacation rentals, mom-and-pop landlords, and small investors flipping homes for profit. According to Marketplace, it could also include so-called iBuyers, investors who “make instant cash offers on homes and sell them soon after.” And, yes, it could also include firms like BlackRock. John Burns looked at houses where the property tax records are going to a different address than the home itself, and Rick Palacios, director of research at the firm, explained that it’s not possible to tell from this data what component of these sales comes directly from institutional investors.
There’s a lot of existing research that indicates institutional investors are a very small share of the investor pool. Goodman cited research released earlier this year that found that institutional operators owned just 300,000 single-family units in 2019. For context, the researchers point out that there are roughly 15 million one-unit detached single-family rental homes. (There are roughly 80 million detached single-family homes total in the US.)
A 2015 study found that large investors made up just 1 to 2 percent of all single-family purchases from 2012 to 2014 while other investors made up 18 to 19 percent. They also found that institutional investors are more likely to purchase homes in neighborhoods “where fewer residents can qualify for a mortgage,” which decreases the likelihood that they are competing with regular homebuyers. Research by CoreLogic not only had similar findings, but wrote that they couldn’t conclude that investors were competing with regular homebuyers: “Possible investors are filling a void in markets where there is less owner-occupier demand.”
It’s possible that this trend has changed over the past couple of years, or that it could change in the coming years, as institutional investors look at the gangbusters housing market and decide to get more involved. But at least right now, these appear to be very small players.
Redfin’s data shows that buyer demand for second homes increased nearly 178 percent from April 2020 to April 2021. (April 2020 was the demand bottom, but as you can see from the graph below, second home demand has well-exceeded pre-recession demand.) It’s possible that a good number of these investor purchases come from second-home buyers.
However, looking closely at certain sub-markets, John Burns did find very elevated investor activity. In Naples, Florida, the group found investor sales have risen 57 percent year over year. In Fort Walton, Florida, these sales rose 65 percent; and in Flagstaff, Arizona, and Punta Gorda, Florida, there were increases of 50 percent and above in investor sales. Again, this does not necessarily mean institutional investors.
Marketplace’s lead anecdote in a story titled “Institutional investors are still competition for homebuyers” is about a first-time buyer who bid on six houses and was outbid by all-cash offers. But all cash doesn’t necessarily mean institutional investors. With mortgage rates at record lows, some people are using all-cash offers to win bidding wars, which have exploded in frequency over the past year.
“Cash purchases in Florida are mostly from people who are relocating here from other states to purchase a second home or a retirement property,” said Tampa Redfin agent Wendy Peterson in a Redfin press release.
Goodman explains that, traditionally, institutional investors haven’t competed with regular people trying to buy homes because their best investment is to buy a home that needs significant repairs that would be “very hard for an owner occupant to do.” That works for large firms because they can achieve economies of scale by hiring in-house construction and repair workers or bidding down the price by offering stable work to contractors for multiple homes.
“When an institutional investor needs [$20,000] or $30,000 in repairs, it would cost you or I [$40,000] to $50,000 to do the same repairs if we knew what needed to be done,” Goodman added. “Additionally, it’s really hard for a homeowner to finance those repairs. … That is where the real comparative advantage is, and those are really the homes that they do well and specialize in.” In general, these aren’t homes that homeowners are looking to buy; institutional investors are actually competing with other types of investors, like regular people who make a living flipping properties.
In a market this competitive, it’s certainly reasonable that investors may be competing with people willing to buy homes they would usually balk at due to repairs. But that simply prompts the question: Why is the housing market so competitive? (More on this later.)
There are reports of institutional investors sizing up, but even with these new acquisitions, they are still a very small part of the market. According to Bloomberg, Invesco Real Estate is backing Mynd Management to spend up to $5 billion in order to buy 20,000 single-family rental homes in the US in the next three years. Bloomberg also reported that another fund (one that manages Canadian pensions) is investing $700 million into single-family rentals. Business Insider reported on Redfin data showing investors spent a record $77 billion on home purchases in the last two quarters of 2020 — this amounted to just 55,000 total homes and 39,000 single-family homes. Additionally, this included other types of investors that are not buying these homes to rent but are buying them to fix up and sell.
The fundamentals of low supply of houses, low mortgage rates, and the entry of millions of millennials into the housing market armed with higher personal savings help explain most of why the housing market has careened out of control over the past year. According to the National Rental Home Council, a single-family home rental lobbying group, “single-family rental home companies accounted for less than 0.14 percent of homes purchased” and just 0.09 percent of net homes if you count the fact that many single-family rental investors sold homes as well.
But these fundamentals also are why institutional investors are likely to continue to enter these markets. They indicate that prices will continue to appreciate for the foreseeable future (if at a less drastic rate than the past year has delivered). That has spurred the existence of the “built to rent” market. Instead of simply buying up existing homes, institutional investors are building them so that they can rent them out directly.
Even though they aren’t to blame for the current housing market calamities, it doesn’t mean that it couldn’t happen in the future.
The good, the bad, and the uncertain about institutional investors
The good: Institutional investors could provide a permanent floor to the US housing market, ensuring that there will always be some demand to hold up the critical industry from complete collapse.
“When the market slows down and there is a recession, housing is super cyclical and [institutional investors] will come in and be buyers throughout that,” Palacios told Vox. “They will, in our view, help support and help put a floor on home prices. If you’re a homeowner, you may in the next recession say, ‘I’m actually thankful for these groups. The entire economy suffers immensely when home prices bottom out. So if we now have institutional industry that will soften that blow, I think that is a good thing.”
According to Lauren Lambie-Hanson, a researcher at the Federal Reserve Bank of Philadelphia, 28 percent of the house price recovery following the bottoming out during the Great Recession could be attributed to the role of institutional buyers.
In some ways, it can be easier to regulate larger entities — there are formal agreements and lawyers familiar with fair housing law and local tenant protections, and the government can audit hundreds of units en masse instead of trying to go small landlord by small landlord, which would be extremely inefficient.
Even if institutional investors are competing with homeowners for existing homes, that doesn’t mean they’re just taking a home off the market — it simply means they are converting it to a rental property. Since renters are on average less wealthy than mortgage-qualifying would-be homeowners, institutional investors might be creating more housing for lower-wealth Americans. Traditionally, there have been no single-family rentals in desirable neighborhoods, which has made it impossible for less well-off people to live in them. That could start to change.
In the aforementioned paper by Amherst Holdings and the Fed, researchers found that while increases in institutional investor activity lead to higher house prices, they also lead to more rental units. They note it’s possible that institutional investors were just better at “picking neighborhoods that would have experienced larger price increases anyway.”
A 2018 research paper that looked at the impact of single-family rental REITs (Real Estate Investment Trusts, a.k.a. institutional investors) on Nashville, Tennessee, indicates that single-family rental investors tend to concentrate in “somewhat less diverse” communities where occupants had “higher levels of educational attainment…higher median household incomes, and lower poverty and unemployment rates.” That indicates that the housing stock that is being converted from owner-occupied to rental units is largely not coming from marginalized communities.
Lambie-Hanson has argued that “there really isn’t any evidence in our research that institutional investors led to higher rents or greater eviction rates for our sample of counties tracked through the recovery.”
The bad: Institutional investors’ incentive to profit and return as much as possible to shareholders is a reason to cut as many corners as possible. Stories like the one Mari outlines in her New York Times Magazine piece are chilling, and it’s clear that even if it might be easier to monitor larger entities, it’s not clear that anyone would actually do that. And in the absence of government watchdogs, tenants would face much larger asymmetries of power than they would with small landlords. An army of lawyers and bureaucracy, for instance, could make it more difficult for tenants who have complaints or are being serviced with unreasonable fees.
And if real estate prices continue to appreciate, that means the growing wealth will be concentrated in the hands of these corporations. If these homes were owner-occupied, they would be concentrated in the hands of homeowners. In a Washington Post op-ed last year, Sen. Elizabeth Warren and Carroll Fife, the director of a California-based housing nonprofit, argued that allowing another “private equity real estate grab… would again give Wall Street carte blanche to use a national crisis to enact a massive, generational transfer of wealth from vulnerable Americans to corporations.”
There is also the concern that since these single-family rentals are concentrated in certain markets, institutional investors could gain market power and raise rents as they face diminishing competition from other landlords.
Bloomberg Opinion columnist Conor Sen told me he worries that “if [institutional investors] are seeing this like Amazon in 2005, and years from now they want to be 100 times bigger, I don’t think that’s something a lot of Americans would want — for there to be very few entry-level single-family homes to buy and there are only opportunities to rent.”
The unclear: How will this all affect the housing market, homeownership, and the need for housing abundance?
A lot of this discussion is happening because people don’t want to address the core reason the housing market is currently out of control: the marked undersupply of housing, which has made real estate such a compelling investment. Combating potential oligopolies, asymmetries of power between landlords and tenants, high rents, and overly high home prices begins with ensuring housing abundance. And there’s good evidence that institutional investors are drawn to markets where housing supply has been restricted. CoreLogic’s research found that investors are attracted to markets where rents are high and that in tighter markets, there were “larger increases in investor activity.”
Invitation Homes, the country’s largest provider of single-family rentals, explicitly wrote that it “invest[s] in markets that we expect will exhibit lower new supply, stronger job and household formation growth” and in places with “multiple demand drivers, such as proximity to major employment centers, desirable schools, and transportation corridors.” Essentially, it is looking to invest in job-rich areas where it expects local governments to continue blocking the supply of new housing even as more people try to move there.
Some have cited concerns that this could lead to these investors lobbying against more housing in these communities. However, there’s a countervailing force here: the renters themselves who would want rents to decrease.
It’s possible that increasing shares of renters in these markets will actually reduce the number of people reflexively pushing back against more affordable housing. Sen makes this argument in Bloomberg:
In a neighborhood full of single-family homeowners today, if a big apartment complex is proposed by a developer, nearby residents will probably show up to local government meetings concerned about the impact of the additional housing supply on their home values…But in a build-to-rent community, the proposition of additional high-density housing means potentially lower rents for existing tenants rather than a loss in home values.”
That means there could be more affordable housing produced in neighborhoods where single-family rentals become a larger share of the market.
The role of institutional investors is still being studied, but the popularity of the narrative strikes at something dangerous: People want a convenient boogeyman and when they get it, they often ignore the structural problems that are harder to combat. Housing undersupply is the result of decades of locals opposing new home building. It’s not something that can be blamed on Wall Street greed and the nefarious tinkering of a private equity firm. And that’s a much harder truth to stomach.
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